There's no such thing as a free lunch (or road): user charges and road pricing

In brief

Whether or not to more broadly adopt a 'user-pays' model for road infrastructure is a contentious debate within Australia. A number of industry participants and bodies have shown leadership in framing and enriching the debate, while others have sought to politicise or inflame the core issues. Partner David Donnelly considers the current state of the debate on user charges for road infrastructure in Australia.

Background

In October 2012, we commented on the role of user charges in infrastructure funding (see Refreshing user charges in infrastructure funding). At that time, we recognised that the adoption of user charges (including for road infrastructure) would require an informed public debate and an articulation of the relationship between the charge and the benefits (to the user) that the relevant infrastructure delivers.

That debate continues. A number of industry participants and industry bodies have shown strong leadership in framing and enriching the debate around the adoption of user charges in relation to road infrastructure, while other commentary around the debate has generated more heat than light.

Framing the debate

A common starting point is to frame the debate as 'free roads' vs 'tolled roads'. This is an unhelpful starting point for two reasons:

• 'free roads' are not free – they are indirectly funded; and
• 'tolls' are not the only alternative funding model – while this is the model the public is most familiar with (and, for some, a model that carries a negative connotation), other models are being considered and tested.

An alternative starting point is to frame the debate as 'indirect funding of roads' vs 'direct funding of roads'. Recognising that road infrastructure is currently funded through a range of indirect methods – such as driver's licence fees and taxes on fuel, as well as out of consolidated revenue – means the debate becomes about how we pay rather than whether we pay.

That recognition, as well as the acceptance that there is a cost being levied, are important.

Advantages and risks in direct funding of road infrastructure

The key advantages of direct pricing are that it is transparent, and it is less susceptible to changes in technology.

Transparency aids the efficient allocation and use of assets (in this case, a road or the road network) by internalising, or allocating, the cost of the asset (or part of it) to users who are deriving the benefit of the asset. Road congestion is a cost of decisions around road use and road (or network) investment. It is also a cost of broader decisions around public transport investment and pricing (and urban planning). Indirectly pricing road infrastructure (so that road use is commonly thought to be 'free') results in a 'tragedy of the commons' style outcome, where users overexploit the network as they are not bearing the true costs of their usage. It can also result in less efficient decision-making around transport because the costs of particular decisions are obscured.

The key risk is that an alternative direct pricing model will not be equitable, or will be unfair. For the model to be accepted, it must be equitable and fair. This is not an insurmountable obstacle.

A number of pricing models are being tested and this issue is well covered in the debate and therefore must (and will) be accounted for in the solution.

The current funding model would arguably fail to meet this hurdle if it was proposed today. For example:

• the increased fuel efficiency of a user's car (and therefore the reduction in taxes paid) does not necessarily reflect a reduction in the costs of that user's use of the roads; and
• the reduced fuel efficiency (and therefore increase in taxes raised) resulting from the use of 'unmade roads' does not align with the reduced cost to deliver and maintain those roads.

As the debate is largely centred around a case for change (rather than a comparison of alternatives), this is not a focus of the debate (other than some brief and unfortunate commentary around whether poor people have cars and, if so, how far they drive them) – but it needs to be.

Advantages and risks in indirect funding of road infrastructure

The key advantages of the current indirect pricing model are the natural advantages of the status quo: familiarity and the relative safety of 'not changing'.

But 'not changing' is a decision, and the safety it provides is always temporary.

As the relationship between the current charges (such as taxes on fuel) and the costs and benefits of the infrastructure they support continue to diverge, a re-examination of the funding model is inevitable. Just as an alternative model will require a clear articulation of the relationship between the charge and the benefits (to the user) to gain public support, the current model's viability over the longer term is dependent on a correlation between charges, benefits and costs.

The key risk to the current model is the increasing divergence between charges, benefits and costs and its weaknesses, which are highlighted by the advantages of direct funding.

Conclusion

There is a need for continued public debate. That debate should be about how we pay for road infrastructure rather than whether we pay for it.

The case for change involves changing to something from the status quo. As part of that debate, it will be necessary to make some comparison between the current funding model and the relative advantages and disadvantages of the various models.

In order to enhance the debate, the public (and industry) need:

• a clear understanding of the current model – current sources of funds, the funding gap, and strengths and weaknesses of the current model;
• a clear articulation of the threshold requirements to be met by any road funding model – both the funding ask, and broader requirements such as equity and fairness;
• an outline of the options for addressing the funding gap (and other weaknesses) through enhancements to the current model;
• an outline of alternative models and their relative strengths and weaknesses; and
• an understanding of any additional benefits that may flow from particular models – such as informational benefits that may improve network decision-making or real-time traffic management.